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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Joining us at the desk Jim Milstein, Goggenheim Securities co chairman,

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Speaker 2: A legend on Wall Street and in Washington. Jim was

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Speaker 2: the Treasury Department's Chief of Structuring Officer under President Obama

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Speaker 2: and a very good person to talk to when people

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Speaker 2: are very worried about the economy, frankly, and so, you know,

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Speaker 2: one thing is that you see investors pricing in now

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Speaker 2: two rate cuts this year, they're worth three priced in.

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Speaker 2: So the outlook is still a little bit sour, but

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Speaker 2: maybe not as dire as before. You see so much

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Speaker 2: under the surface because you're also a structuring advisor. Do

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Speaker 2: you think that the fear is warranted?

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Speaker 3: Well, I think the you know, the chaff said at

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Speaker 3: the last interview, he did the really he's looking to

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Speaker 3: the Treasury Department into the White House at this point

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Speaker 3: to see the direction of their policy. You know, tariffs

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Speaker 3: are a big change in the potential economy of the

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Speaker 3: United States and the world economy, and so that will

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Speaker 3: influence both short term price pressures as well as economic activity.

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Speaker 3: So I think he's kind of frozen for a while

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Speaker 3: until he sees really where we're going with tariffs and

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Speaker 3: how the rest of the world reacts to those tariffs,

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Speaker 3: and whether we get a growth slow down as a

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Speaker 3: result of retaliatory tarwer you know, high tariffs being imposed

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Speaker 3: here and retaliatory tariffs being imposed outside.

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Speaker 4: Can we already tell I mean, Jim Farley, the CEO

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Speaker 4: Ford said, these tariffs or the threats thereof, are causing

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Speaker 4: chaos and costs, and it seems to me that in

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Speaker 4: the next round of CPI, PPI and PCE, we're going

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Speaker 4: to start seeing that shine through.

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Speaker 3: Yeah, I think you're I mean, just anecdotally. I think

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Speaker 3: some of us are already seeing prices go up on

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Speaker 3: the things we buy as a result of suppliers and

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Speaker 3: sellers getting ahead of it. So yeah, I think you know,

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Speaker 3: in the short run, tariffs are an increase in the

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Speaker 3: price level, but thereafter, you know, it may just stay

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Speaker 3: at that level. So the rate of change may not

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Speaker 3: be great in twenty twenty six as it will be

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Speaker 3: in twenty twenty five when the tariffs are imposed.

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Speaker 4: Well, but Jim, all this, you know, all this uncertainty

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Speaker 4: in not only tariff policy, but we don't know what's

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Speaker 4: going to happen with regulation and tax cuts. Are in

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Speaker 4: question right mass deportations that seems to be affecting everything

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Speaker 4: from small businesses when you look at the nfib NO

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Speaker 4: expansion to you know, Morgan Stanley and City saying, like

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Speaker 4: the M and A bankers and the IPO guys that

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Speaker 4: we have not really necessary right now.

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Speaker 3: Yeah, I mean, listen, I think one of the two

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Speaker 3: big pieces of legislation that President Trump got through in

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Speaker 3: his first term was his US NCA the tariff deal,

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Speaker 3: the trade deal between Mexico and Canada.

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Speaker 4: Trade deal anyone's ever seen, according to the White House.

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Speaker 1: Yes, and.

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Speaker 3: As a result, I mean that's been in place now

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Speaker 3: for seven eight years. And US manufacturers, which is the

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Speaker 3: sector that the Trump administration now wants to promote. US

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Speaker 3: manufacturers laid out their supply chains in Canada and Mexico

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Speaker 3: based on the rules of the road established by the

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Speaker 3: usmca So you know that no one should be surprised

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Speaker 3: that they were surprised by the threat of imposing twenty

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Speaker 3: five percent tariffs on Mexico and Canada are two largest

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Speaker 3: trading partners, and why are they our two largest trading

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Speaker 3: partners Because the USMCAA created a roadmap for how to

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Speaker 3: take advantage of relatively lower wages in Mexico and take

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Speaker 3: advantage of relatively lower commodity prices in Canada to set

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Speaker 3: up your supply chains for domestic manufacturing, you.

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Speaker 2: Know, aside from tariffs obviously creating a lot of havoc

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Speaker 2: in the market. That's fair to say. On tax cuts,

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Speaker 2: one question I have this was supposed to be one

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Speaker 2: of the biggest parts of the pro growth agenda, that

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Speaker 2: and lighter regulation. But how likely is it that we

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Speaker 2: see a lot of those promises come to fruition And

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Speaker 2: if we don't, does it stifle that pro growth story.

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Speaker 3: Well, let's first be clear and level set right.

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Speaker 1: So, the extension of the twenty.

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Speaker 3: Seventeen tax cut, Tax Cut and Jobs Act is basically

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Speaker 3: the status quo ante. If it isn't extended, you would

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Speaker 3: have a tax height hike on households. The corporate tax

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Speaker 3: cuts were made permanent, but the household cuts were not.

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Speaker 3: So they if they don't extend them, you're going to

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Speaker 3: get a tax hike. But if they do extend them,

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Speaker 3: it's just the same tax regime we're in today.

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Speaker 1: Now.

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Speaker 3: President Trump has a campaign talked about further tax cuts,

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Speaker 3: no tax on tips, no tax on social security, no

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Speaker 3: tax on overtime. You know that would uh. The the

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Speaker 3: estimates are all over the places to what that cost

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Speaker 3: to revenue would be. But it let's assume it's somewhere

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Speaker 3: between two hundred and three hundred billion dollars a year,

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Speaker 3: so over the ten year period, another two to three

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Speaker 3: trillion dollars worth of UH incremental debt for those tax

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Speaker 3: cunts at a time we're already running a deficit, uh

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Speaker 3: equal to seven percent of GDP. So let me just

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Speaker 3: stop there a little bit, cause this is really to me.

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Speaker 3: You know, I guess f If you're a hammer, everything

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Speaker 3: looks like a nail. If you're a debt restructuring guy, uh,

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Speaker 3: everything looks like a need for a debt restructuring. Today,

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Speaker 3: our debt our federal debt to GDP ratio is basically

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Speaker 3: one to one. We're running a seven percent of GDP

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Speaker 3: deficit this year, okay, which means that debt is increasing

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Speaker 3: by seven percent a year, whereas the economy has only

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Speaker 3: been growing a two to three percent a year. So

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Speaker 3: we're basically becoming more indebted over time because the growth

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Speaker 3: of the economy is not outpacing the growth of the debt.

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Speaker 3: So there's a massive need for what we call in

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Speaker 3: the trade fiscal consolidation. We need to get our house

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Speaker 3: in order and create revenues closer to spending.

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Speaker 4: Well, and they're hoping to get those revenues with tariffs.

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Speaker 4: I guess in terms of the cuts, I mean, Scott

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Speaker 4: Beston has this three to three to three plan, but

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Speaker 4: it seems so unrealistic to get the deficit from seven

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Speaker 4: percent down to three percent if you're only able to

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Speaker 4: find like fifty eight dollars and twenty six cents in

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Speaker 4: waste and fraud, right, because they're not attacking Medicare and

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Speaker 4: Medicaid and military spending, they're trying to fire people at

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Speaker 4: us AID.

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Speaker 2: Which guys especially as growth is expected to slow. I

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Speaker 2: think that that's the part no one's talking about here,

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Speaker 2: that how do you grow into that? At the GDP

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Speaker 2: forecastulting revised.

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Speaker 3: So that's to be fair to mister Besson, he's talking

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Speaker 3: about a four year trajectory to get the deficits down

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Speaker 3: from seven percent of GDP to three percent of GDP.

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Speaker 3: He's talking about goosing the growth rate of the economy

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Speaker 3: to three percent, not in the of low twos, high

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Speaker 3: ones that we've been in and trying to moderate inflation

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Speaker 3: by having more energy production.

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Speaker 1: You know, with oil in the sixties.

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Speaker 3: You're not going to get more energy production here in

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Speaker 3: the United States.

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Speaker 1: It's just it's just not return on capital. Isn't there

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Speaker 1: for that.

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Speaker 3: So let's put aside whether or not that's the best

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Speaker 3: way to deal with inflation.

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Speaker 1: How do you goose the growth rate? Well, the theory of.

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Speaker 3: The administration is that deregulation is going to free animal

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Speaker 3: spirits in the business community, that the tariff walls are

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Speaker 3: going to create a surge and domestic investment to produce

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Speaker 3: because behind those tariff walls you can be more competitive

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Speaker 3: against foreign competition. The problem with all of that is

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Speaker 3: it takes a lot of time. Deregulation is going to

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Speaker 3: take a lot of time. The rules that are currently

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Speaker 3: on the books that they want to get rid of

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Speaker 3: the agencies actually just can't say done by executive order.

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Speaker 3: They have to go through a rule making process. They

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Speaker 3: had notice and hearing, and they have to unwind the

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Speaker 3: regulatory state. Is going to take even if they move

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Speaker 3: with lightning speed, is going to take a year or

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Speaker 3: two to fully unleash the animal spirits.

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Speaker 1: And with regard to setting up new.

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Speaker 3: Production facilities in the United States and reorganizing our supply chains.

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Speaker 1: That's a multi year effort.

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Speaker 3: So and you're doing it against the backdrop of high tariffs,

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Speaker 3: potentially retaliatory tariffs, which could be a growth slowdown, as

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Speaker 3: you say, Sali, which means that tax revenues might shrink

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Speaker 3: in the in the short term, and god forbid, we

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Speaker 3: have a recession and then not only do tax revenue shrink,

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Speaker 3: but expenses go up because of all the countercyclical programs

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Speaker 3: we have to ease the pain of a recession.

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Speaker 2: Even if you see the FED cut twice this year,

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Speaker 2: does that relieve these companies of the pain they're struggling

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Speaker 2: through refinancing at these higher rates.

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Speaker 1: No, the answer is no.

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Speaker 3: The so you know, you look at the credit markets

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Speaker 3: and the corporate credit markets. There was a huge surge

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Speaker 3: of refinancing activity that went on when rates were low

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Speaker 3: in the early post COVID period, when the FED had

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Speaker 3: driven rates back again down to virtually zero before the

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Speaker 3: bout of inflation. Most corporate debt has a maturity of

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Speaker 3: five to seven years, so we're now at the end

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Speaker 3: of the maturity of that wall of refinancing that went

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Speaker 3: on there now, So now we've got a new wall

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Speaker 3: of refinancing that's required at much higher interest rates. So

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Speaker 3: even if the Fed knocks fifty basis points off the

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Speaker 3: low end of the curve, the early the short end

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Speaker 3: of the curve, the uh far end that n you know,

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Speaker 3: the belly of the curve out uh in the five

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Speaker 3: to seven years, zip code companies are that did their

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Speaker 3: financing back in two thousand, two thousand, uh, two thousand, twenty,

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Speaker 3: two thousand, twenty one are now gonna be refinancing in

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Speaker 3: a much higher interest rate environment.

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Speaker 1: Uh. And you know it's the As the.

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Speaker 3: Uncertainty, the general macro uncertainty creeps into the credit markets,

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Speaker 3: you're seeing as slow, not not dramatic, but a slow

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Speaker 3: uptick in spreads uh in the non investment grade market.

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Speaker 3: And so both h uh, higher base rate and higher

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Speaker 3: spreads are gonna create higher interest burdens.

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Speaker 4: Why are spreads so tight right now? I mean, especially

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Speaker 4: if you see an increase in bankruptcy or a concerning

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Speaker 4: absolute number of bankruptcies, why do you have spreads, even

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Speaker 4: junk spreads so tight.

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Speaker 3: There's a there's just a tsunami of credit availability.

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Speaker 1: Right now.

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Speaker 3: There has been uh, you know, the growth of the

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Speaker 3: private credit businesses, which is unrelenting and can tenuous, you know,

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Speaker 3: which in some way is really taking recycling money out

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Speaker 3: of the insurance industry, which used to be big bond

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Speaker 3: investors and continue to be bond investors into a series

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Speaker 3: of specialist funds to do their underwriting. And you know,

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Speaker 3: there's plenty of bank liquidity available.

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Speaker 1: And private credit. Yeah that was I say private credit.

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Speaker 2: Well to that end, is this masking some of the

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Speaker 2: pain that's really under the surface.

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Speaker 1: What are you seeing.

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Speaker 2: Because when you think about a bank, say, well, consumers

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Speaker 2: are fine. Consumers are fine, but Bank of America and

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Speaker 2: average FICO scores well over seven fifty is almost eight

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Speaker 2: hundred for many of its credit lines, and so you're

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Speaker 2: not really seeing the American consumer there. You're not seeing

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Speaker 2: the painful companies that are maybe being turned away from

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Speaker 2: a JP Morgan type firm today.

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Speaker 1: Yeah.

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Speaker 3: There, I mean, so you take the you know, four

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Speaker 3: years of pretty high inflation, and while there has been

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Speaker 3: wage growth to compensate that, wage growth is moderating, So

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Speaker 3: you're really seeing the consumer starting to be pinched. And

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Speaker 3: that's why you're seeing the first set of distress show

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Speaker 3: up in consumer oriented companies. You know again, it's this

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Speaker 3: is with sign upol credit availability and a change in

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Speaker 3: the capital structures, particularly in the middle market arena where

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Speaker 3: you have not so much bank finance but private credit

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Speaker 3: and private credit is usually one or two lenders. So

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Speaker 3: when a company gets into trouble, even a private equity

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Speaker 3: sponsored company, you can have a conversation like this about

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Speaker 3: what are we doing?

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Speaker 1: Nobody else knows about what are we gonna do about it?

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Speaker 3: And so there's an awful lot of what we call

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Speaker 3: liability management exercises going on in private conversations between a

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Speaker 3: private credit fund and a private equity fund, or a

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Speaker 3: private credit fund and a family owned business.

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Speaker 4: So I'm bringing up these stats a lot lately. That

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Speaker 4: bank balances have declined over the past twelve months back

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Speaker 4: to pre pandemic levels, this across all income groups. Wage

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Speaker 4: growth has slowed over the past twelve months across all

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Speaker 4: income groups, and that Americans inflation adjusted debt is rising

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Speaker 4: past you know, twenty nineteen levels across all income groups.

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Speaker 4: And yet everyone says, never count the American consumer out.

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Speaker 1: I've been doing this for.

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Speaker 4: Twenty five years.

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Speaker 1: It's a good thing to say.

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Speaker 4: Yeah, right, why is the American consumer so resilient and

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Speaker 4: does that continue?

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Speaker 3: It's about credit availability, you know. And just look at

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Speaker 3: the federal government, right, as long as people are prepared

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Speaker 3: to fund you know, one point seven trillion dollar deficit,

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Speaker 3: we can the Congress can continue to spend with abandon.

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Speaker 3: As I said earlier, you know, I think we're coming

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Speaker 3: to the end of that cycle because we're at the

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Speaker 3: point where the debt's growing faster than the economy. But

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Speaker 3: as long as there's the last lender there willing to

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Speaker 3: lend you that time to finance your spending, you're going

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Speaker 3: to take it. When the alternative is you know, a restructuring.

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Speaker 1: Yeah, or no iPhone right, Yeah, they're giving them away.

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Speaker 1: You just have to sign a contract. Yeah.

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Speaker 2: Obviously a lot of things to watch around the corner. Jim,

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Speaker 2: we thank you so much for your time. Of course,

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Speaker 2: that is Jim Milstein of Guggenheim Securities